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Talk to The Times: Andrew Ross Sorkin

Andrew Ross Sorkin, assistant editor of financial news, is answering questions from readers Nov. 9-13, 2009, in Talk to The Times. Questions may be e-mailed to askthetimes@nytimes.com.

Mr. Sorkin wrote his first article for The New York Times when he was 18 years old just prior to graduating from high school. Now, 14 years later, he is the paper's chief mergers and acquisitions reporter and a financial columnist. He started DealBook, The Times's financial news site and daily e-mail newsletter, in 2001.

Mr. Sorkin just completed his first book, "Too Big to Fail: How Wall Street and Washington Fought to Save the Financial System — and Themselves," about the financial crisis, published by Viking Press.

Fascinated by the financial world, Mr. Sorkin joined the paper's London bureau after graduating from Cornell University and immediately set about trying to break news of big mergers. Over the years, Mr. Sorkin has broken news of deals including Chase's acquisition of J.P. Morgan and Hewlett-Packard's acquisition of Compaq. He also led The Times's coverage of Vodafone’s $183 billion hostile bid for Mannesmann, resulting in the world's largest takeover ever. For his coverage, he has won a Gerald Loeb Award, one of the highest honors in business journalism, and he has been honored with the Society of American Business Editors and Writers Award three times.

During the past year, he has covered many aspects of the financial crisis, from Lehman Brothers to AIG to the faltering automakers. Mr. Sorkin can often be seen talking about the world of business on the PBS program "Charlie Rose" and CNBC.

Other Times staff members have answered questions in this column, including Executive Editor Bill Keller, Managing Editor Jill Abramson, Managing Editor John Geddes, Deputy Managing Editor Jonathan Landman, Assistant Managing Editor Glenn Kramon, Obituaries Editor Bill McDonald, National Editor Suzanne Daley, Living Editor Trish Hall, Entertainment Editor Lorne Manly and N.B.A. reporter Jonathan Abrams. Their responses and those of other Times editors, reporters, columnists and executives are on the Talk to The Times page.

These discussions will continue in future weeks with other members of the Times staff.

Which Banks to Bail Out

Q. You seem convinced the banks are worthy of being bailed out, so how do you feel about C.I.T. going down without a whimper?

A. Thanks for your thoughtful question. You raise an important point: Should certain institutions be “rescued” and others be let to fail? This very question is going to be part of the national conversation
for a very long time.

The conundrum for lawmakers has been this overwhelming feeling that certain institutions are “too big to fail”
because of the systemic risk they pose to the rest of the economy. Of course, the flip side of the equation is that certain firms, like C.I.T. for instance, have been deemed “too small to save.” My colleague Floyd Norris wrote a smart and funny column about this
topic following Lehman Brothers’ bankruptcy, in which he argued that Lehman was not “reckless enough” to be saved.

And therein lies the great paradox of the bailouts: If you poll the country, the public feels as though the government is rewarding the most reckless failures, while smaller, perhaps less reckless firms are allowed to fall by the wayside. And that, viscerally, seems fundamentally unfair.

Yet here’s the problem: Firms like Citigroup or Bank of America probably are “too big to fail.” We saw how the failure of Lehman Brothers cascaded throughout the economy, infecting not just the rest of Wall Street, but Main Street, too. If the government let even bigger firms fail, most economists are in agreement that there would be a high likelihood that we’d have a repeat of September 2008 and perhaps even of the Great Depression.

As with all things in life, the right answer is not black or white, nor is it satisfying.

Q. Where can individual investors find the latest information for corporate restructuring activities such as spinoffs and carve-outs?

A. In the world of deal making, restructuring is one of the most active areas these days. As the air has been let out of the economy, many companies that borrowed too much are now scrambling to find ways to raise money to pay back their loans — and that typically means selling assets or spinning off divisions. In the restructuring world, as Peter points out, that is often described as a carve-out or spinoff. Clearly, too many companies and private equity firms gorged at the trough of cheap debt, and are now struggling under the weight of monthly payments they can’t make.

We try to cover much of that world on DealBook. You can click on the Mergers & Acquisitions tab, the I.P.O./Offerings tab, the Private Equity tab (since private equity is frequently a buyer or seller in these deals) or the Legal tab (that’s where we keep news about bankruptcies, which usually require a restructuring of some sort.)

In addition to DealBook, there are a number of terrific resources outside The New York Times that follow this area in an even more specialized way. The Deal does some of the best coverage in this area. PEHub, a site about private equity published by Thomson Reuters, also does a nice job. There’s also a blog called Bankruptcy Bill that focuses on the legal issues surrounding bankruptcies and restructurings that’s pretty interesting. And if you’re in the industry and willing to pay a premium, a site called Debtwire is one that many professionals frequent.

What if There Had Been No Bailout?

Q. Would you speculate on what would have happened if, when Wall Street began to buckle, the United States and other world governments had simply said, "Well, that's tough luck, you guys made some bad business decisions, better luck next time," and offered no bailouts? I can understand some abstract results — no one lending money, no one trusting anyone enough to lend money — but what would that look like at the corner gas-and-go shop, mini-mall or big box store? And how long would it have taken for any changes, as a result of government tough love, to be felt on Main Street, and how different would the world look today?

A. What a question! It may be one of the biggest mysteries of this generation. I often ponder what, if the government had just let Bear Stearns fail on March 16, 2008, would have happened next. I suspect the answer is that Lehman Brothers, which collapsed in September 2008, would have filed for bankruptcy on March 17 or 18 and the rest of the economic dominoes would have followed suit.

Would the problems on Wall Street have infected Main Street as much? I suspect so, in part, because confidence in the system might have been shaken even more, since the successive failures would have come as even a greater surprise. (Remember, for most people, Bear's near-failure seemed to happen almost overnight.)

Oddly enough, Lehman's stock had at one point fallen by 40 percent on the day after Bear was saved, which just demonstrates the pressure that was building on them even in March. (By the way, if you go back in a time machine to the rescue of Long Term Capital in 1998, Bear and Lehman were considered the next dominoes then, too.)

It is of course hard to be certain, but it seems likely that the most vicious part of the crisis might simply have come sooner. Add on top Fannie Mae and Freddie Mac — at a time when the government didn't have the powers to put them into conservatorship — and it's possible the crisis could have been even worse. Or better. We'll never know.

Photo

Andrew Ross SorkinCredit
Fred Conrad/The New York Times

Are the Bankers Sorry?

Q. This may sound Pollyannish, but while you have been interviewing the Wall Street chief executives for your book, did you ever get the sense that they felt responsible or remorseful for the damage they had done? Or for that matter, did they feel any gratitude toward the average taxpayer for saving them?

Much of the anger in the country could be abated with a simple “I’m sorry” and “Thank you for coming to our rescue.”

A. I must say that one of the frustrating parts of researching my book came when I finally got to ask the question of Wall Street chief executives and board members that you just raised: Do you have any remorse? Are you sorry? The answer, almost unequivocally, was no. (Or they just didn't answer.) They see themselves as just one part of a larger problem, with many constituencies to blame.

Many of the most senior members of management on Wall Street now consider themselves “survivors,” as if they were cancer survivors or something. That’s the word they use. While many of them are self-aware enough to politely nod at the notion that they received help and were part of the problem, they seem reluctant to acknowledge they were “rescued” or “saved.” There are probably a few exceptions, so I shouldn’t paint them all with the same brush, but on the whole, that was the takeaway.

I recognize that that answer will only increase public outrage. But it is true.

Bank-Failure Dominoes?

Q. Can you explain the why the fall of one bank puts pressure on the next bank? Is the way the dominoes are going to fall obvious?

A. Anna, you ask a very good question. Last September, in the midst of the panic, Wall Street banks were indeed lined up like dominoes about to fall. While the orders of the dominoes were clear then, they are less so now. (And let's hope there are no more failures.)

The order was determined by size and strength — and ultimately, by the confidence, or lack thereof, by investors. After Bear Stearns fell in March 2008, investors immediately seized upon Lehman Brothers as the next smallest investment bank that could falter. The broker-dealer model — the concept of a firm that literally borrowed much of its money overnight on a daily basis — was under attack; any firm that didn't have stable deposits like a big commercial bank was in jeopardy. When Lehman was near collapse, the view was taken that Merrill Lynch would be at risk. (That's why it sold itself over a weekend to Bank of America.) After that, Morgan Stanley was next in line. And then, finally, there was Goldman Sachs. Beyond that, who knew what would happen? Inside Treasury and elsewhere, the next domino was actually considered General Electric.

The dominoes were lined up because as one bank fell, investors became increasingly nervous about who could fall next. That led to panicked selling in the stock market, but just as important, led many investors to ask to have their money returned. Others bought insurance, known as a credit default swap. It became a vicious cycle.

Stock Buybacks and Small Investors

Q. I’ve never figured out whether stock buybacks (instead of dividends) were good for the small investor. Are they just another way for management to micromanage their quarterly earnings per share? Does the money for buybacks necessarily come from retained earnings, or are corporations using borrowed funds?

A. Stock buybacks are a double-edged sword. Companies that buy back some of their own shares when the price is low can be making a very good deal for their shareholders. But more often than not, companies, especially in the past couple of years, have bought back shares at the top of the market, and it has proven to be a lousy use of their money. Share buybacks also have the effect of reducing the number of outstanding shares of a company, and bolstering the stock price in the short run. But most acedemic studies on the topic aren't very impressed with them.
Companies that reinvest profits in their business or pay them out in dividends seem to do better.

Systemic Risk and Moral Hazard

Q. Going back to the days leading up to the bailout, did you ever come across anyone quantifying the systemic risk? These were all number guys, yet no one brought up a number. They had no trouble coming up with a bailout bill, but did they ever consider that they overpaid? (Especially considering that some of the bailout recipients achieved record profits less than a year after almost being out of business.)

Also, if I am not being too greedy, did you find that the moral hazard actually has sunk in? Meaning, do the recipients think that if a situation should arise calling for another bailout, they can just assume they'll get it?

A. You won't like this answer: No. In all my reporting, I have yet to find a single report by the Federal Reserve, the Securities and Exchange Commission or the Treasury Department that actually quantified the risks to the system prior to the crisis with any specificity.

There were a handful of memos about possible problems and what that might mean — and thoughts about whether the government should buy up toxic assets or make capital injections. But on the fateful weekend when Lehman Brothers filed for bankruptcy, no one was looking at a chart, for example, with projections about what was about to come next.

Having said that, though, Lehman actually sent a memo to the New York Fed that weekend to suggest that the markets would fall apart — but it was clearly too late.

As to the second part of your question, about "moral hazard" — the concept that the government has provided a safety net that might entice exectives to take more risk — it is now clear that for the largest banks, at least, the government will save them. The government has been pretty explicit about that. Smaller firms are less likley to get help.

However, I doubt that the government plans to prop up even the biggest firms forever. Gieven the current outrage across the country, Congress is looking at a number of proposals to help regulators unwind these firms in an orderly way should they run into trouble again.

Facts, Rumors and Trial Balloons

Q. How do you know the difference between what's "fit to print" and what is
confidential or inside information? Is there a line in the sand? Do you legitimize rumors and deliberately placed trial balloons by printing them?

A. Thanks for your question, Larry. We spend an enormous amount of time reporting, speaking to multiple sources and then cross-checking that information again, in order to make sure that we're only printing news that's "fit to print." As you can imagine, there are lots of people with agendas who want to spin the story or, as you said,
to float trial balloons. Our job is to cut through the clutter to determine the facts and make sure the reader gets the most accurate information.

When there are different perspectives on what the facts mean, we try to tell readers about those different perspectives. We also endeavor to explain where a source is coming from — that is, how the source stands to benefit from telling us something or from taking the position that he or she is taking.

As to your question about publishing confidential or inside information, we regularly seek news and other details about events that have not been publicly disclosed. In that sense, we are trying to bring more, not less, transparency to the marketplace and the markets.

Readers look to us, and to other publications, to tell them what is going on, including some things that people in government or companies may not want to publicize. We see this as our public duty.